Good morning, ladies and gentlemen. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q1 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. The host of the call is Greg Dilworth, VP of Investor Relations. Please go ahead, Mr. Dilworth.

Thanks Mike, and good afternoon, everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2019. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com. We will begin today's presentation with an overview of our first quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions on this today's call. Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this afternoon's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean.

Thanks, Greg, and good afternoon, everyone. Turning to Slide 4. The Company reported underlying earnings of $717 million, up 9% over the first quarter of last year, excluding the impact of interest on par seed capital in Q1 of 2018. Underlying return on equity was 13.3% for the quarter. The yesterday we announced the dividend increase of 5% reflecting our continued earnings momentum. With a LICAT ratio of 145% at SLF and at 21.1% leverage ratio, capital remains a key strength for Sun Life as we adhere to our disciplined approach to capital allocation, including investments to grow our business organically and the repurchase of shares in the quarter. For the first time in our history, we reached $1 trillion of assets under management. It took us 147 years to reach the first 500 billion of AUM and just seven years to add the next 500. Our clients in AUM have benefited from a prolonged board market and the positive investment returns we have generated for clients. The growth in AUM also reflects an important aspect of our four pillar strategy and which we favor businesses that have built in growth, whether it be through equity markets, healthcare trend, or the demographics in Asia. Insurance sales in the quarter were up 17% over the prior year with double-digit growth in both Individual Insurance and Group Benefits. Wealth sales were down 10% primarily driven by lower sales in our Canadian and Asian businesses. Importantly, our value of new business VNB was up 14% compared to the first quarter of 2018 from higher individual life and group insurance sales and improve pricing in the U.S. Across our businesses, we continued to drive outcomes that reflect our purpose and make it easier for clients to do business with us. In Canada, we collaborated…

Thanks, Dean and good afternoon, everyone. Turning to Slide 6, we take a look at the financial results from the first quarter of 2019. We've got a good start to the year with strong profitability, double-digit value of new business growth and continued financial strength. Reported net income of $623 million was down from $669 million in the prior year. Prior year results included the impact of interest on par seed capital in Canada and the U.S.’s results which contributed $110 million to earnings in Q1 2018. Reported net income this quarter reflected market related impacts which reduced earnings by $69 million after tax. Underlying earnings were $717 million, down from $770 million in the prior year. Excluding the interest on par seed capital, underlying earnings are up 9% or 11% on earnings per share basis. Compared to prior year, underlying earnings also included favorable experience items including investing activity gains, mortality, morbidity, lapse in policyholder behavior and expense experience. This was partially offset by unfavorable credit experience related to related to downgrades from indirect exposure to a single name in the U.S. utility sector, which I will discuss in more detail in a few minutes. Our underlying ROE of 13.3% was within the target range for our medium-term objective of 12% to 14%. We maintained a strong capital position with a LICAT ratio of 145% for Sun Life Financial, Inc. or SLF and 132% for Sun Life Assurance Company of Canada. The higher ratio at the SLF level reflects the excess cash of $2.6 billion held by SLF. Our leverage ratio of 21.1% remains the lower long-term target of 25% and is another potential source of capital for capital deployment. On May 13, we will redeem $250 million in subordinated debentures, which will reduce our leverage ratio by approximately…

Thanks Kevin. To help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourself to one or two questions and then to re-queue with you with any additional questions. With that, I'll now ask Mike to please poll the participants for questions.

[Operator Instructions] Your first question comes from Humphrey Lee from Dowling & Partners.

Good afternoon and thank you for taking my questions. My first question is related to the favorable expense experience in the quarter. And I was just wondering if Kevin can provide some color in terms of, was it a benefit of kind of more disciplined expense management? Did you highlight at the Investor Day? Or is just the timing of expenses? And if you can elaborate a little bit on the level of expense, Kevin in the quarter that would be helpful?

Well, thanks Humphrey. I’ll start and Kevin Morrissey may add some – it's Kevin Strain, Kevin Morrissey may add some comments. As we talked about Investor Day, we've been working hard across the organization on expenses and as we called it bending the cost curve, and on – if you reflect the impact of currency, take the impact of currency out, we were flat year-over-year in expenses, and for our controllable expenses we had a moderate increase of 1%. At the same time as we were working hard on controlling our expenses, we saw the business grow both on the new business side and in the in-force, which saw us adding allowables and the combination of those higher allowables and good work on managing the expenses resulted in the gain.

So it sounds like it's more of a kind of the expense management that you talked about as opposed to timing.

Yes, you're seeing a lot of good impacts of the expense management coming through.

Yes. Humphrey, it’s Kevin Morrissey. Let me just add, you saw that we had $11 million after tax gain in the expense line. It is from the growth of the business and the expense management so both of those components. We would expect to see those to be volatile, moving forward quarter-to-quarter and our outlook on that would probably be more around zero, but it was certainly a strong quarter.

Got it. And then shifting gear to U.S. Group benefits. I think when you look at the overall strong sales and in-force premium growth in the business, especially in stop-loss. I was just wondering from a broader perspective, have you seen any kind of market expansion in the stop-loss market? Or are you just seeing you and maybe some companies are taking market share?

Well, Humphrey, this is Dan Fishbein. The stop-loss market continues to grow for a few different reasons. First of all, the size of stop-loss premiums grow with medical costs trends. So that's about 6% to 8% a year. Also more employers are self insuring. In recent years, we get about a 0.5% growth in the proportion of employers that are self insuring versus fully insured as a percentage of the total market each year. And then we are also taking share. There's no question we're taking share from competitors. So our very good growth is fueled by all three of those factors.

So do you feel like the – and at the same time you have very favorable underwriting results, do you feel like that would potentially leading to any kind of downward pressure on pricing or just the fact that the medical cost trend and the level of additional employers looking to self-insured will more than offset that pressure?

Well, historically, if you look back over the past 10 years or so, the stop-loss business has been somewhat cyclical. There have been times of expanding margins and then increasing competition that's led to compressing margins. We're not seeing that phenomenon right now, although we've been in the good part of the cycle for about 2.5 years now. From our own perspective, what we can say is that we're still selling and renewing our business at or above our target is rising. So at the moment we're not seeing irrational or aggressive market behavior.

Thank you so much.

Your next question comes from Meny Grauman from Cormark Securities.

Hi, good afternoon. Just wanted to start with the Asia segment. It was noted that there was favorable joint venture experience in that segment. So I'm just wondering if you could provide a little bit more detail of what's driving that experience, what geographies is this, is this primarily bank insurance driven? Thanks.

We'll ask Claude Accum to take that call or that question, sorry.

Meny, it’s Claude Accum here. I'm not sure which particular item that you're seeing. I actually see joint venture experience going the other direction. Can you give me where you get your question from?

In the MD&A I thought there was a reference to positive joint venture experience in Asia, but anyway…

Meny, it’s Kevin. So we have two large joint ventures. Of course, we have a joint venture in Malaysia, which we managed, but that come through the joint venture piece, which is India and China. We did have some gains in China in that segment. But overall, I think Claude is talking about sort of – you're focusing on one piece and Claude is talking about the overall joint venture experience. So that’s the two new tie-in, but just that's how they do.

Okay. Moving on just in terms of MFS, just wondering about that institutional flow and if there's anything unusual there that you would highlight or are we just seeing the trends that we've been talking about for a while just continuing or if there's anything just that you would call out in the quarter in terms of influencing those flows?

Good afternoon, Meny. It’s Michael Roberge. Yes, it really is the same themes that we discussed, de-risking, rebalancing, it's not been performance related. And so the same themes that we've talked about over a number of quarters were true in Q1 as well.

Okay. Thank you.

Your next question comes from Gabriel Dechaine from National Bank Financial.

Good afternoon. The first question is on the buybacks and, yes just trying to figure out what that says about your M&A ambitions? I know you're a notionally looking at something in Asia or are bulking up the U.S. group business. The decision upsides, the buyback mean there's nothing really imminent on any of those files, or is it really just an expression that overall you could do that plus accommodate more buyback?

Gabriel, it's Dean. It's the ladder. So we have as you know a very strong balance sheet, lots of excess cash at the hold-co, lots of leverage capability. And so this extension of the buyback, which is not big in dollar terms just gives us some more flexibility as we one run through to the end of this particular NCIB period. We're pleased that we've been able to fully execute on the previous NCIB that we launched last August, executed on that over the first nine months. And this just gives us a little bit more flexibility. As you know, we're getting closer to – closing soon on the GreenOak transaction. That will be deployment around $200 million when that transaction closes. So we've got capital to do things like that to give us the flexibility to do more NCIB, but also to do acquisitions, a small, medium and large.

I might just add to that Gabriel, as we discussed at the Investor Day, the Company is generating after dividends $800 million in capital each year, and we've been running on the buyback close to $200 million a quarter, which is kind of keeping us at the excess capital position we've been at.

Clear, and is there heat meter on the file. I'm joking. What have you answered that? That'd be great. My real second question, no, I tend to kind of disregard the macro factors, I shouldn't probably, but this quarter, the interest rates impact is pretty larger than what I would have got – what I did get through using your sensitivity guidance and I'm just wondering if there's an element of the flat yield curve we saw during the quarter and they're inverted for a bit. That may have been a factor there or perhaps a, maybe another next explanation as to why it was large and if it's just, gave your math is wrong then and that's fine.

Gabriel, it’s Ken Morrissey. Thanks for the question. You are right. It was larger than we'd be implied by our sensitivity, which are very simple stylized sensitivity is based on parallel movement in yield curves. And as you noted we had a bit of a flattening in the yield curve for Sun Life that does cause us some larger losses. So probably about 60% of the incremental loss, what has been from flattening of the yield curve? We also had some losses related to derivatives that we use to hedge some of the interest rate risk and a market to implied volatility changed a bit with which reduced the value of those derivatives. So that's something, again that wouldn't be in the simple sensitivities we disclosed.

What's that 60% of the deviation?

If you look at the markets broadly, they were down about 30 basis points. So based on our sensitivity that would imply about a $60 million drop we saw about twice that. So the various would have been about $60 million incremental loss, so $35 million ballpark additional loss from the flattening of the yield curve.

Okay, great. Thanks a lot.

Your next question comes from Doug Young from Desjardins Capital.

Good afternoon. Just maybe starting Kevin with you on the lab side. It's – obviously you may have made some adjustments from the actuarial side recently. But it keeps persistently being negative and just wanting to get an update. What it was this quarter in what you're seeing?

Thanks. Good morning. It’s Kevin Morrissey again. So on the – what we did see in the quarter we saw lots of $8 million. It was from various sources across a number of business groups, all quite small and I'd say relatively benign. So as you noted, we had some historically large losses related to the U.S. in-force business. We took significant strengthening in Q3 and we've been pleased with the results that have been very small gains and losses. Since then so we're very satisfied with the action that we took relative to those historical losses and we see the results this quarter the small loss being kind of in the range of normal volatility.

So you're not seeing any particular trend in any one business. This seems to be a shotgun and your U.S. experience on the lab side seems to be normal. Is that fair?

That's fair. Yes.

Okay. I'm actually going to go at the buyback a little differently. I mean, you increased your buyback 4 million shares. Again, it's 220 million, if you're generating 800 million of capital – excess capital a year and you're buying back 200 million. You've giving yourself another quarter of buyback. Why not increase it more? Why not double the buy back and give yourself more flexibility or my doing the math wrong or missing something? Thanks.

No, Doug, we did this is an amendment to our current NCIB which would end in August. And at that time we would look at whether we renewed or not. This gave us the most flexibility.

Okay. That's fine. Thank you.

Your next question comes from Sumit Malhotra from Scotiabank. Your line is open.

Just on a couple of the moving parts on the book value that are upcoming. So this is likely for Kevin Strain. So you gave us or you reconfirm your sensitivity and that would be I think you told us about 100 million if the 15 basis point reduction is enacted? Are you expecting that to be in the actuarial review in Q3?

Yes, Sumit. This is Kevin Morrissey. We are expecting that. So as you're probably aware, the actual standard board did release their initial standard and it is a 15 basis point reduction in the long-term URR, which is the one that we're sensitive to. And so our estimate of that is 100 million after tax reduction. We are planning to do that in Q3 that similar to what we had done the last time this came around in 2017.

Okay. Well, so we'll see that and then as far as a GreenOak is concerned, when that transaction was announced in December, it was stated that the impact on shareholders' equity on merging the two entities, GreenOak and Bentall Kennedy would be $730 million. Is that Kevin's still good accurate number and are we likely to see that before the end of June?

Well, I'll let Steve talked about the timing of the transaction, but in terms of the accounting impact that's roughly what we're still expecting.

And in terms of the timing of the transaction, it's been taken a while because we've had to get regulatory approval and a number of jurisdictions. Those are going quite well. In fact, we just got more approval today. We would expect this to close right around the end of the quarter, maybe July 1 as opposed to June 30, but we're on track for closing in over the next couple of months.

And to the extent we talked about this transaction, Steve, over the last few months. A lot of it has been on the potential diversification for the business with respect to geography and frankly strategy in terms of how the respective real estate portfolios are managed. And maybe the right time to ask it in a quarter where Sun Life had positive expense experience for the first time in a few years, at least the way you report it. You're putting together two entities here that get you to close to 40 billion in assets. Is there anything we should expect from a expense synergies prospective or with this franchise being more in growth mode, is expenses not really a big part of the story in the near-term?

I mean, I think that as these two entities come together, we're going to find some efficiencies from an operating standpoint. That really was not the driver of the deal. The driver of the deal as you mentioned was about the expanded range of capabilities on the real estate side, which allows us, there's a trend in the market of institutions wanting to reduce the number of real estate managers. This gives us a broader platform, with a high growth entity with exceptional return. So the transaction was really about broadening our positioning. I do expect the margin, we're going to find some efficiencies, but it wasn't the driver of the transaction.

Last one for me. I'm going to say it's going to be Kevin or Claude. Just wanted to circle back on Asia. I know obviously you've got the – let's call it the credit provision in the quarter or the credit downgrade in the quarter had an impact on the earnings and the segment. But when we look at expected profit, where I don't think that would have factored in. The growth rate was about 2%. Kevin in your comments, you seem to be distinguishing between what was happening in the quarter, insurance and wealth part of the business and then international. I feel like we haven't had to talk too much about the international piece of late, maybe just a little bit of color from you to reiterate what exactly drove the contribution from the international piece down this quarter? And are there factors that were one-offish in nature? Or is this something where we should see a lower run rate from international in the near-term?

So I'll start and then maybe Claude can jump in. It’s Kevin Strain. So on the international, there was three big impacts to international. International took almost the entire PG&E impact that I talked about in Asia. So the downgrades to the investments that PFI’s we had. The second is international, it's the first time this has happened in a long time and you do get some volatility here, had bad mortality experience. And then with the lower sales, it had some more new business strain in international. So if you looked at the earnings impact in Asia, international was a significant piece of the decline and underlying earnings with each of those three components. And in order that I mentioned, the credit, the mortality and then the new business strain. If you look at Asia expected profit from the core sort of seven local businesses as Dean called them earlier. We did see some – the expected profit there grew, but more moderately than you would expect. There was an impact on our fee income from equity market declines in six of our seven markets in Asia, and that impacted the fee income there. So you've got the combination of a couple of different things happening in Asia.

And just on the fee income piece, I would think that that has a lot to do with where you started in the quarter in terms of AUM as opposed to where you ended it.

Yes, that's right. It's really to do with the sort of the equity market performance and where the quarter started and what happens. You've got a lot of impact in Asia to – related to China and China economy and those types of things as well.

Thanks for your time.

The next question comes from Steve Theriault from Eight Capital.

Thanks very much. To start, if I could just follow-up a bit on the Asia, International. PG&E, I understand that was split across divisions, but just going into the sales, probably for Claude. Claude, last quarter you talked about new product launches, rate volatility, extending the selling cycle and how sales are getting pushed into this year. But the Q1 sales were pretty modest. Can you update us on just the confidence level around getting sales back to the prior run rate and how quickly we should expect to see that?

Yes. Steve, it's Claude Accum here. And we've seen these two quarters now. So starting in Q4, we did see a shift in market preferences for certain products away from the traditional universal life product that has been very successful for us for the last decade. And as you pointed out that shift away from UL continued in Q1 in the high net worth space. So how we've responded is we're focusing on products that operate better in a low interest rate environment and offer equity market participation, so the two products we're focused on our indexed universal life and par whole life. That was actually already launched the indexed universal life high net worth product offshore. And we've also successfully launched up a high net worth par product onshore in Hong Kong. And that product is gaining quite a bit of traction and it’s driving some of the strong sales that you're seeing in Hong Kong. And so we're going to continue that progress and this week, this month we're going to be launching a competitive high net worth par product into the offshore market. So we'll have two products out there in this space and we're looking for that product to garner as some good sales trends traction in the second half.

In the second half. And then just one last thing on that, as you’re migrating away from that traditional UL product. That was a good support item in the context of the strain line with these new products have like, will they have similar propensity to help that line item in the source of earnings?

This product would have some of the strengths of the UL product? It's an interesting product and that it's – to the cycle, ultimately it's a very capital, low capital intensive products. So we think that could be quite favorable.

Okay. And then the last thing for me was, also in Asia, but on the wealth side, I think Kevin, you mentioned in your opening remarks about, was it Philippines money market. But the last few quarters the sales have been more like $2 billion versus $3 billion. When you look back to prior run rates, I think that's right anyway. How much of that is that sort of money market noise that's not all that impactful to the margin? How much of it is potentially just slower wealth sales that have been offset by some strong insurance sales over the last little bit?

It’s Claude Accum. I'll be happy to go with that first. As you point, our wealth sales were down in Q1. They were down by a $1.9 billion, about $1.3 billion of that is actually coming from India and about $300 million from the Philippines. So in India, what you're seeing is industry sales are actually down about 50%, and that's similar to us and that's due to the Indian markets, where mid cap is down 3%, small cap is down 14%. And so that's impacting the India markets. In the Philippines, the $300 million decrease was mainly in money market sales and that was more in the institutional space. It's due to a large institutional sale in the prior year. So that's not retail. And so our wealth sales are basically following what's happening in the equity markets. As Kevin has indicated, the six of our eight countries are down significantly year-over-year, but as the market rebounded and we saw that in Q1 that we did see an uptake in March. And so we think, our well sales will follow the equity market cycle.

Okay. Thanks for the color.

Your next question comes from Tom MacKinnon from BMO Capital Markets.

Yes. Thanks. I was wondering, you might be able to split out with the expected profit is in Asia between Asia kind of proper I'll say, and international because it's kind of different stories. One is that complete high net worth and other is a kind of a growth in the emerging middle class. So would you be able to share with us proportionately how the expected profit might split between those two?

We haven't separated those two Tom. It's – we can think about that sort of going forward and how we want to disclose these, but we've included just sort of the one item on the source of earnings. I think if you thought about my sort of broader comments, you can think about, this sort of local markets in Asia, focus on growth and getting the growth up and, and what really impacted them this time was the fee income on the markets. And then on the – in terms of the expected profit in international, the sales don't have a, a significant impact on changing that. That's over a longer-term that that would sort of impact those pieces. But we're not. We haven't separated out the two.

Okay. Then if I go to the U.S. Employee Benefits or sort of the U.S. Group Benefits, the margin obviously better at 7.9% probably helped by the great mortality, morbidity experience you had in a quarter and you're 6.5% target, what is the – are their policyholder experience gains, like mortality or morbidity games in that 6.5% and if so, how much you need in order to hit that.

Tom, this is Dan Fishbein. We recently updated our target to 7% plus, and we don't assume, explicit morbidity or mortality, gains, in order achieve that we price for the margins that we're seeking to achieve. And as I mentioned earlier in stop-loss, for example, we've been able to be very successful pricing for those margins. The margin in the first quarter, it's on a trailing 12-month basis was obviously very much benefited by favorable morbidity experience in the stop loss business.

Okay. That's great. So you’re assume zero. And then the final thing, with respect to Canada, years ago this – we had a career salesforce that was probably growing, I don’t know modestly. And now if you look over the last several years this career salesforce continues to decline. So strategically, it used to be sort of a good par sales and maybe mutual fund sales machine. Strategically what's happening here with the Sun Life career salesforce down 8% in 2017, 8% 2018 and then another 5% year-over-year?

Thanks for the question Tom. This is Jacques. You're right 5%, this last time. I'll take you back perhaps a 18 months to 24 months as we changed our focus a little bit one from I would say just recruiting more advisors to one of improving the overall client and adviser experience. Right? And that's meant a lot of changes in terms of the digital experience that we're delivering. So that ultimately our advisers can work more effectively with their clients, deliver a better quality product and so on. And so the other thing I would say if it's not shown in a numbers, but because of the increased focus on quality, Tom. We've been putting the bar higher on the number of recruits. And so we're recruiting and quite a few less and we use to and those that we do, it's kind of the fail-pass process in a way we tend to recognize faster. If they're going to make it or not. But if you'd split the number of advisors into two buckets, you'd fine – and let's say you define these buckets as more experienced advisors versus newer more developing advisers. You'd find that actually were kind of flat on the experience advisors that sort of support, this a strategy that I was telling you about. Strategically speaking I'll remind you that we are focused on two different channels, career salesforce is a very strategic for us, but so is the third party? The sales continued to be good. If you go back, seven or eight quarters, we're either number one or number two. We were number one for the full-year 2018. When we look out we've said that at Investor Day if you remember, but we have a point of view generally that Canadians are insufficiently insured. So we think the model we have is we pretty a good one and in terms of the CSF. As said, I was very focused on digital and technology and bringing tools to our advisors and it's stabilizing. So we think that you'll see a decreasing numbers there in terms of headcount decrease.

Okay. Thanks for that.

And our last question is from Mario Mendonca from TD Securities. Your line is open.

Good afternoon. Can we just go back to the U.S., expected profit and I'm referring and let’s exclude MFS for a moment. It does look like on a U.S. dollar basis it was flat year-over-year. And I'm trying to sort of piece together what we're seeing here because it doesn't look like it's a margin story necessarily it looks maybe like it's more around the asset growth side. And the reason why I'm sort of going at this is because the – what we are instead seeing instead of the expected profit growth, we're seeing the experience gains emerged so strongly in? Is that really where you'd guide us that we really should be piecing those two together?

I might be able to start and I've got the detail thing front of me, and I’ll give Dan a chance to talk about the other piece, but you have to remember Mario, there's a couple of other pieces inside of the U.S. including individual insurance, which is a runoff business. So you see the expected profit, but it come down a little bit over time and there was a small negative in business group capital. So it may be a little counterintuitive because it doesn't relate directly back to the group benefits piece and the group benefits piece. We saw growth in stop-loss that really supported the overall growth in Group Benefits expected profit.

Yes. And you'll see some additional growth and expected profit in the second quarter because the way we record this is in the quarter when business is effective, it's recorded as new business gain and then it transitions over to expected profit in the subsequent quarters. So with such large stop-loss sales this past January 1, which was part of the first quarter, you're seeing that phenomenon and then we'll see some of that switchover next quarter.

Okay. I think that's sort of clarifies it for me. If we could think a little bit about experience then. And just on the total company basis, there were a few items there that turned me off. First the other, the minus 35 million I think last year you gave us or last quarter right. He gave us a good understanding of what was in the positive 38. Have you spoken yet to the minus 35 and I may have missed it. I'm not sure.

Yes. Mario, this is Kevin Morrissey. I’ll talk a bit about the other. So we had losses this quarter of $18 million and so that's more in line with what we would expect kind of on a going forward basis and that’s similar to what I had said a couple quarters ago. What we're seeing in that line or some of the shorter term strategy costs build out of our wealth strategy and digital projects in Canada. Some of that in the U.S. is related to Maxwell Health. And in the corporate line we also have some projects been related to the IFRS 17 project. And so that – those totals of about minus 18 that's more in line with what we'd expect kind of in a normal quarter.

So those are minus 18, so there was just other stuff going on that got you to minus 35 then.

Yes.

Sorry, I just don't follow. You are offering me an explanation of how it got to minus 18, but the number is minus 35, is there anything else you can offer?

The minus 18 is the after tax number, Mario.

Yes, minus 18 is after tax for the quarter.

Yes, I misunderstood.

Yes.

Okay. I totally understand that. In the investment activities, we're also very strong. Was there something – is this just a number that we'll see bounce around based on the opportunities to invest the proceeds of sales or new business essentially?

Yes, I think that's the way to think about that Mario. That's a little higher than our sort of typical run rate, but we were able to deploy some PFI investments with higher spreads against some of our liability segments and that drove the gains.

Yes. And Mario, it’s Kevin Morrissey. I maybe just add to that. You are right that it's going to bounce around a bit with the volume of new business sales as well. And so where we have big annuity sales in the quarter, you might expect to see that a little later in the in-force, but we continue to source good volumes with good spreads to put against the liabilities.

If you looked at the total of experience notables $57 million in the quarter, the last eight quarters have averaged around $42 million. So it is a little higher in total despite the fact that we had the PG&E impact in the quarter.

That's helpful. Thank you again.

Your next question comes from Darko Mihelic from RBC Capital Markets.

Hi. Thank you. I just wanted to look for a little more color on the indirect exposure to PG&E, it surprised me a little bit in the quarter. And I guess, and what I mean by color is I don't really understand where you sit today. So in other words, you downgraded some of these credits by how much? What happens next quarter? Do they go up? Do they go back down again? What does the prospect for more hits coming from this? And then I guess, because I have to go back all the way to Q1 2010 to find credit experience of this magnitude for Sun Life. And so on a broader question, I guess the question is, should I be tracking bankruptcy's for further sort of downgrades and credit experience. And I guess essentially what I'm asking is the upgrade to downgrade kind of ratio that you had this quarter, how far off from normal is it? And maybe I’ll just stop talking there and you can provide us with a little more color on this, so that I can better prepare for the future.

It's Randy. Thank you for the question. So we have – as you know, no direct exposure to Pacific Gas and Electric rather these indirect exposures in that corporate loan book. These are renewable energy power agreements where they are the – they purchased the power coming off of these production units. So we downgraded them internally based upon the public bankruptcy of the Pacific Gas and Electric. And the reason we do that is the rating methodology that we've used is standard and it is a combination of expected loss and probability of default. So while we feel economically we have many levels of protection we'd have to burn through because we are very quite secured in these cash flows. The probability of default loss which led to an internal downgrade and therefore, strengthening of the reserve. If you were to exclude this one name, we actually had more upgrade than downgrade and had one of our best credit quarters in quite a long time. So it is fairly idiosyncratic in nature.

Given that there was a bankruptcy that causes, I mean is this credit now considered also in default, even though it's current, is there further downside possibility? I mean, what happens next if we go to the bankruptcy proceedings? Does it come back to haunt you later on or does it actually get upgraded? I mean, I'm just curious on where we sit today with respect to this credit.

All right. So as we – from where we sit today, it's definitely a complicated work out, which we think will take several years. We PG&E is current and all their payments on these contracts in our holdings are all right. And so that's why you're seeing no impairments on these. In terms of the future path, as I said, there are multiple layers of protection in a bankruptcy, in certain states in particular, anything can happen, but we think that the probable course is a fairly protracted workout, where we think economically we should recover. So if that's the case, you would see these be written up over time. If for some reason things turn materially negative, which again is not what we expect. There is potentially downside on them. Remember they are producing energy in California and need energy. So that's not going away. They're producing renewable energy in California has mandated 33.33% of all of their energy in state will be provided by renewables by 2020 moving up to 100% by 2045. Remember these are long dated project. So they're not going away. So if – so and then the payments are being passed through to the cost to the rate payers. So it's a complicated situation, but based on every, every piece of analysis we've done today, we think that it should work out favorably.

Darko, it’s Kevin. With the help of Kevin Morrissey talks about how the downgrade impacts the liabilities because this ends up being a significant portion of the investment as well.

Sure. Darko, it’s Kevin Morrissey here. When the securities aren't downgraded, the actual reserves pick up an increased risk margin. These provisions in the future, as Randy noted, they're quite long-term securities. So the reserving impact is present valuing of this extra risk margin over extended periods of time. And so that's part of what's contributing to the severity of the impact in the quarter.

Okay. But I guess I don't want to keep beating this dead horse too much longer, but it was just a one notch downgrade. I don't know, it sounds like it must be a large exposure and I guess what's the ultimate worst case scenario?

It's Randy, Darko. No, it was internally we had a multiple notch downgrade, that we did we have a standard methodology and that's what came out of the probability to fall in the expected loss calculation. There's a wide range of potential outcomes within any rating as we've said. So, it's not that the position itself was in anyway particularly outsides for our balance sheet. It was the multiple notch downgrade given the duration and the reserving methodology.

Okay. That's very helpful. That's what I'm searching for. Great, thank you very much.

Your next question comes from Tom MacKinnon from BMO Capital Markets.

Yes, thanks. Just a quick follow-up, I think just to confirm, I think you talked about a target LICAT at the SLA of 120% and maybe a leverage target of 25% and of the $2.5 billion at the hold co – if you can confirm those, and at the $2.5 billion at the hold co, how much would you be prepared to take that down to like to $500 million at the lowest level? Thanks.

So Tom it’s Kevin. Yes, we've talked about a leverage target of 25% that's correct. And we've talked about keeping $500 million sort of cash buffer. So that second part is also correct. We haven't given are LICAT target ratio. There are a lot of assumptions out there and that I know different analysts have been making, but we have not given a specific target around that. But we have given the cash, which is how we look at our capital position at the hold co. And we've also talked to at Investor Day how much additional cash we'd get from going to our target of 25% leverage and then how much in addition to that – we could get if we went up to 30%. So we have significant capital flexibility. And the other thing we look at when we think about capital, we look at our capital sensitivity and the strength of the capital in terms of sensitivities improved significantly with the movement to LICAT and that also gives us confidence in different scenarios. So we look at the – I think the right way to look at it is that the cash of the hold co $2.5 million and thinking about $500 million to be, to be held as a buffer and then the leverage position and we can move up on the cash.

Thank you.

And that was our last question. At this time, I will turn the call back over to Greg Dilworth for closing remarks.

Thanks Mike. I would like to thank all of our participants on the call and if there are any additional questions, we will be available after the call. Did you wish to listen to the rebroadcast? It will be available on our website later this afternoon. Thanks and have a great day.

This concludes today's conference call. You may now disconnect.